Adjustment Costs and Capital Asset Pricing

ABSTRACT

Discrete‐time models of asset pricing have hitherto generally avoided studying the relationship between the underlying technology
inherent in the economy and the determinants of the price of capital. A fully articulated economy is constructed in which
there is a nontrivial technology for producing capital. The existence of adjustment costs in augmenting the quantity of capital
has interesting implications for the stochastic properties of asset prices, as well as other macroeconomic variables. Examples
of such economies are used to illustrate this point.